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Nexen, Petronas approvals seen as new openness to offshore investment

However, Prime Minister Stephen Harper is raising the threshold on similar takeovers in future.

By Michael Lewis and Vanessa LuBusiness Reporters

Fri., Dec. 7, 2012

Ottawa’s approval of two major oilpatch acquisitions by state-owned enterprises — in the wake of a controversial rejection of a foreign takeover in 2010 — signals new openness to offshore investment, observers said Friday.

“Canada was running the risk of sending a really negative message” after Ottawa turned down BHP Billiton Ltd.’s bid for Potash Corp. of Saskatchewan two years ago, said Oliver Borgers, an antitrust and foreign investment lawyer with McCarthy Tetrault LLP in Toronto.

Borgers said Ottawa needed to reassure investors, particularly in Asia, that it is open for business while assuaging concerns in the federal cabinet and the public about any loss of control resulting from takeovers of resource companies by interests abroad.

“I think the government was able to finesse this,” said Yuen Pau Woo, president and CEO of the Asia Pacific Foundation of Canada.

In a long-awaited decision, the Harper government announced late Friday that CNOOC Ltd., controlled by Beijing, can go ahead with its controversial $15-billion takeover of Calgary-based Nexen Inc.

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As well, Malaysian-owned Petronas’ $6-billion buyout of Calgary’s Progress Energy Resources was approved on the grounds that it will provide “net benefit” to Canada under the Investment Canada Act. That decision reverses an earlier rejection of that acquisition.

The two approvals contributed to a rise in late trading in the value of the loonie against the U.S. dollar.

Prime Minister Stephen Harper, who has been under pressure from his own Conservative caucus to tighten up on foreign investment by state-owned companies, particularly those in China, took pains to say he was closing the door on similar deals in future.

“These decisions are not the beginning of a trend but rather the end of a trend,” he said in a statement.

With that pledge came revisions to the Investment Canada Act to head off what the government fears will be a wave of takeovers by foreign state-owned companies. In future, Harper said takeovers of Canadian oilsands firms by foreign state-owned enterprises will be approved only on an “exceptional basis.”

As well, the government will increase the threshold for reviews of takeovers by private companies under the Investment Canada Act to $1 billion over the next four years. However, the threshold for review by state-owned companies will remain at $330 million.

Woo, however, said he believes nothing is off the table ultimately, arguing that Ottawa has simply granted itself flexibility to consider direct investment proposals case by case.

He said the immediate impact of the approvals will be positive for Canadian growth and job creation.

Kyle Preston, an oil analyst at National Bank’s Calgary office, said the approvals could revive long-term plans for the Long Lake oilsands project in the Athabasca region of northern Alberta, a joint venture between Nexen and CNOOC Canada.

University of Alberta professor Richard Dixon welcomed Ottawa’s decision. “We just need to tighten up the rules.”

Dixon said the approvals give the two state-owned companies a chance to prove that they can abide by Canada’s rules, including labour laws and environment policies. If they do not prove to be good corporate citizens, it would shut the door for others, especially state-owned enterprises.

While the CNOOC-Nexen deal is large — the largest for a Chinese company in Canada — Dixon argued it is still small considering there is already $100 billion worth of the investments in the oilsands.

Laura Dawson, president of Dawson Strategic, a firm that specializes in international trade and market access, said Harper has put state-owned enterprises on the B list of desirable investors in Canada.

“They are letting CNOOC and Petronas in, but they are partially closing the door behind them,” she said, pointing out that in 2011 CNOOC was able to acquire OPTI, another oilsands company.

Dawson argued that the policy change is in part a nod to populist demand, in particular keeping the threshold for review of state-owned enterprises acquired Canadian companies at $330 million.

Peter Morici, professor at the Robert H. Smith School of Business at the University of Maryland, called the approvals “lousy for Canadians.”

He said the government is inviting a takeover of natural resource enterprises by Chinese state-owned firms, who “are not a bunch of Boy Scouts.”

Morici said funding to develop oilsands and other energy projects is available without resorting to investment from Chinese-controlled firms, adding that oilsands expansion is largely a function of global crude prices.

He also suggested that the U.S. could, for national security reasons, attach conditions that require CNOOC to divest joint assets it holds in the U.S. That could undermine the rationale for the Nexen takeover.

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